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View Full Version : Company Stock Pump & Dumps And Red Flags - by Guapo



HNnrITotoi
07-20-2015,
The following article was taken from another board and was written by Guapo (someone that i highly respect and who has taught many much about the market.) A couple of paragraphs that were directed to another investor were edited by me.

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Company Pump & Dumps And Red Flags by Guapo

This is a post about company pump and dumps, those conducted by companies, selling their own stock. It does not discuss pumps and dumps conducted by organizations or groups of individuals (Group Plays) outside or not associated with a company.


Part 1 of 4 Parts

As with all companies, not just the pennies, investors have to watch and see if the company produces. Pumps and dumps continually promise everybody everything except the moon, and they would promise that too if they could get away with it. However pumps and dumps rarely deliver on their grandiose promises of the future.

If a penny company wants to establish rapport and trust with the investing public, it must prove itself to be legitimate by demonstrating verifiable progress and results in its business.

How do I determine if a company is a pump and dump? I look for red flags. If I see five or more red flags on a company, I will then assume it’s a pump and dump. What do I consider red flags? Here's a list.


1. Grandiose predictions in PR~s that simply do not seem plausible

CMKM (stock symbol CMKX) was a good example in 2004 or early 2005. Out of the blue they announced they had a gold mine in South America and would start shipping the ore by boat to the U.S. for processing. Knowing what it cost to ship anything these days, it seemed prohibitively expensive. It did not appear logical to me. As it turned out, CMKM never shipped a pound of ore to the U.S., nor did they ever recover a single gram of gold. Their stock was deregistered last year and the company went out of business.


2. Fluff or fluffy PR~s that have nothing of substance in them

Such PR~s are simply hot air and nothing more, designed only to keep the company’s stock in the foreground. Announcements of Joe Blow joining the board of directors, or Peter Piper promoted to the position of chief engineer are worthless. Proclamations congratulating other companies or organizations for their achievements or accomplishments are meaningless.


3. PR~s containing weasel talk

Weasel talk is language that appears to say something concrete but doesn’t really. Weasel talk is highly prevalent in PR~s.

For example, a company issues a PR with this phrase in it, “The board of directors today announced it has approved a stock buy-back plan of 700 million shares.”

It sounds dandy, doesn’t it? When that PR hits the street, the PPS will probably zoom, at least move up some anyway. However, the PR does NOT say the company will actually buy-back 700 million shares. The board only approved the buy-back. The company is under no legal obligation to buy-back shares.

Suppose another company issues this PR, “The company feels a stock buy-back is in its and the stockholders’ best interests. Therefore we will buy back up to 500 million shares to reduce the float.” Note the words up to in the phrase. That means if they buy back ten shares, they have satisfied the requirement.

Some folks have argued strenuously with me on this point, claiming companies can not say such things in PR~s and get away with it. “It’s illegal,” they say. Unfortunately it is not. The companies are operating well within the law.

Albertgax
07-21-2015,
3. PR~s containing weasel talk (continued)

Other common phrases you see in PR~s include, “The company intends to…”, “The company foresees a profit of…”, “The company has signed a contract with…”, “The company anticipates $20 million profit from its contract with…”.”

Any phrase announcing their intention to do “such and such” is not binding by law.

If a company intends to…. “Well, our plans changed.”

If the company foresees a profit of… “Errr, sorry, it didn’t work out as we expected.”

If a company signs a contract with… “We did but after a week, the other company canceled it.”

The company anticipated… “Gee, we really over-estimated our profits on that one, didn’t we?”

Companies can to some extent be held liable for specific declarations that they don’t accomplish. For example if a company says, “We will buy back 200 million shares of stock by the end of this month,” and they don’t, then stockholders may (possibly) have a valid grievance.


4. Failure to live up to, within a reasonable time frame, actions and goals the company said it would accomplish, accompanied by the lack of a logical explanation why it failed

A company that accomplishes nothing, or appears never to do so, indicates one of four possibilities, the company is incompetent, lazy, is in the wrong business, or is a pump and dump. Any one of these makes it a risky investment.


5. Pinks failing to file (voluntary) reports to the SEC
Agreed there are reasons why a pink may want to remain so. It’s a red flag for me however – one strike automatically against them – because there’s very little verifiable information about pink companies. The pinks are where most of the abuses in the stock market occur. I don’t especially like trading the pinks but so often that’s where the action is.


6. OTCBB companies failing to meet their filing deadlines

If a company can’t get their paperwork done on time, how competent is it in its business? It can also be an indication the company is hiding something.


7. Previous reverse splits, stock symbol and company name changes, sometimes accompanied by changes in the business they’re in

This is a serious red flag for me. A company that pulls a R/S is likely to pull a second and third one. Reverse splits are almost always done with a stock symbol change. A stock symbol change makes it more difficult to trace the history of the company.

Companies that pull reverse splits, change their stock symbol, the company name and re-invent themselves with a new business are demonstrating they haven’t been successful in the past. Successful companies don’t pull reverse splits, change their stock symbols and re-appear as new companies. A company re-inventing itself in this manner often makes it extremely difficult to trace its history. Usually, in my opinion, companies that do such are pump and dumps and nothing more.


8. A continual increase in the size of the float (dilution)

Such is an indication that stock from somewhere is being bled into the float. That’s what a pump and dump does, sell stock.

9. An increase in the A/S, especially a large one

Companies do not increase their A/S, unless they intend to use the additional stock, else why increase the A/S in the first place? There might be legitimate reasons a company needs to increase its A/S but all too often those increases end up in the float, which is not good for stockholders. Pump and dumps that are really successful will increase its A/S, several times if it can get away with it, as long as its scheme is still functioning. The folks running the scam will continue as long as they can, selling stock into the float until the PPS totally collapses.


10. SEC filings indicating the sale or transfer of stock for employee compensation programs and other entities, especially if they’re frequent

Distribution of stock is just another method of selling it, to employees or other individuals. When this happens there may be several sources dumping stock into the float at the same time.


11. Mumbo-jumbo financial statements that no one understands

Financial statements are difficult for most of us anyway because we aren’t CPA~s. Still, when you read one that has a lot of vague language in it, and seems very unclear as to the actual status of the company’s finances, it’s likely just a game of smoke and mirrors. An honest company will report its finances accurately and clearly.

12. CEO~s who have had past or have pending difficulties with the SEC over alleged violations of SEC rules and/or Federal Statues

This is obvious. Zebras don’t change their stripes and rarely do humans. A CEO with no past problems but with current ones is of course, innocent until proven guilty. We are investors however, not a jury, so when you encounter a CEO with legal problems such as these, take a look at the charges and information available and see if its likely he’s innocent or guilty. Remember, you aren’t deciding whether he goes to jail or not, you’re simply trying to keep the weasels out of your pockets.

HoseRojGex
07-21-2015,
13. CEO~s with past histories that indicate they were involved in previous pump and dump schemes

Same as red flag #12, most folks don’t change much. If you encounter a company that appears to be a pump and dump and you find the current CEO has been involved in what looks like previous pump and dumps with other companies, well?


14. Company executives spending a lot of time doing other things than conducting business

A company that’s spinning its wheels at activities other than their primary concern is an indication it isn’t serious about conducting any real business or generating any profits from it.

Again, CMKM is a great example. Besides their gold mine in South America, they were supposed to be digging diamonds out of the ground in Canada. The company executives however spent a lot of their weekends in Arizona or Nevada racing cars. They even had their own CMKX racing car. Company officials claimed it was for advertising the company. Why would a mining company need to advertise itself to the public? It wasn’t DeBeer’s selling wedding rings in shopping malls.

And just how was CMKM financing their car racing escapades? Surprisingly enough, or maybe not, very few people questioned the purpose of the company’s car racing activities or how it was being financed.

It didn’t make sense to me. Why wasn’t the company devoting its time to recovering the alleged diamonds from their land? The company claimed it had millions and millions of dollars of them in their land in Canada. So why were they down in the lower forty wasting their time racing cars instead of doing everything possible to recover the diamonds? CMKM never recovered a single marketable diamond either.


15. Companies that are continually in the red for several quarters in a row but manage to stay in business

You wonder how these companies, with no outside source of income stay afloat. Often the company is selling stock. These companies will turn up with Red Flag #8 too, for as they continue to sell stock, the float will keep increasing.


16. Companies that suddenly pop-up, doing business in the latest hot sector of industry, or in the newest fad

These companies spring from nowhere to capitalize on the latest fads and what’s hot in the stock market.

Remember after 9/11, within months there were suddenly a multitude of homeland security stocks on the scene, all claiming to have, or would soon have government contracts?

Then we had SARS stocks, followed by Katrina stocks, companies working every imaginable angle possible, implying they would make money off the hurricane.

Somewhere in this mix for a while, we had companies with connections in China. They were gonna score big by doing business with Chinese companies. For a while, a company could simply mention its China connection and its stock would gain twenty or thirty percent, sometimes more, overnight. At one point there were so many companies joining the fray, I wondered how the wire services kept up with the flood of PR~s hitting their desks.

The bird flu stocks were next, some of them alluding to cures or prevention of the disease. These tiny companies, whom no one had ever heard of previously, were suddenly here to save us from the latest scourge. It was amazing, with so little expertise and funding, how they were suddenly claiming they were able to do what reputable companies couldn’t do.

The latest craze has been energy stocks, including ones in the ethanol sector. Small companies that were below the horizon, with little business activity or anything else previously, have been some of the hottest ones in the penny stock market the last two months or so.

Of course, among all these new companies, there have been a few legitimate ones. However most of them faded rather rapidly from the scene. How many homeland defense, SARS, Katrina, China-connected or bird flu stocks can you name now?

Horaciokirm
07-21-2015,
17. Companies that hopscotch from one business to another

These types of companies begin in one business, meander along for a while, issuing PR~s, etc, then find another business to enter. In a year’s time, they may be in several totally unrelated activities.

For example, a real estate organization, will suddenly buy a gold mine in North Dakota, with promises of riches beyond their dreams just over the horizon. A big stir arises of course. Then a few months will pass with no results and the company discovers untold wealth in a modeling agency, so they purchase it. The hoopla swirls around the company again for a while, finally fading. Then it decides that buying up mom and pop restaurants is the key to success, so off it goes again on the new venture, or in a lot of instances, pretending to.

It’s implied in successive PR~s of course that each new venture is booming and is expected to bring large amounts of cash into the company. You would think some of these penny companies wanna be the next James Ling and LTV.

So there’s a list of red flags. Five or more and I become very suspicious. Some folks have told me I’m cynical and paranoid. I don’t argue with them. My excuse is I got that way from playing the pennies too long.

The End

hoqvmqxd33
07-21-2015,
Great information fireopal! I wonder how these 'make believe' companies are able to even issue stocks to be traded? I mean, could I go down to the county courthouse, get my DBA and start issuing stocks? Do they have to be incorporated? I don't know anything about that process of how a company issues shares of stock but it seems those companies would have to present some sort of credentials to even get started trading, even as pinks. Who does all the paperwork and arrangements, how do they get a ticker symbol? etc etc.

Also, what is A/S ?

Thanks.

admin
07-23-2015,
Quote:
Originally Posted by lovemoney View Post
Great information fireopal! I wonder how these 'make believe' companies are able to even issue stocks to be traded? I mean, could I go down to the county courthouse, get my DBA and start issuing stocks? Do they have to be incorporated? I don't know anything about that process of how a company issues shares of stock but it seems those companies would have to present some sort of credentials to even get started trading, even as pinks. Who does all the paperwork and arrangements, how do they get a ticker symbol? etc etc.

Also, what is A/S ?

Thanks.
glad you liked it and beyond any doubt this is one of guapo's best articles imo and is why i brought it here.... helped me in a very big way to better understand playing versus investing in most penny companies...

a/s = authorized shares...